Tax Court Decision Pertaining to Cost Segregation

By Kenneth H. Bridges, CPA, PFS     June 2012

Owners of potentially depreciable real estate properties often attempt to segregate the property into components other than land and structure in order to accelerate their tax deductions for depreciation.  Land itself is nondepreciable, residential buildings (e.g. apartments) are depreciable over 27.5 years, and other commercial buildings are generally depreciable over 39 years.  Meanwhile, depreciable land improvements and items of tangible personal property may be depreciated for tax purposes over periods ranging from 5 to 15 years or, even better yet, immediately expensed under bonus depreciation or Section 179 rules.

In a recent Tax Court case (AmeriSouth XXXII vs. Commissioner) involving the owner of an apartment complex which was extremely aggressive in its depreciation classification of components of an apartment complex it acquired, the court ruled almost entirely in favor of the IRS; holding that the majority of the components of an apartment complex were structural components depreciable over 27.5 years.

So does this case spell the end for cost segregation?  Probably not.  While, at first blush the case is certainly concerning, a closer analysis reveals a number of mitigating factors:

1)    In the AmeriSouth XXXII case, the taxpayer and its cost segregation specialist were extremely aggressive, treating as 5-year property many items which are generally conceded to be 27.5 year property; including items for which there appears to be no support under the law for treating as other than 27.5 year property.

2)    About the time the case was tried, AmeriSouth sold the apartment complex in question and stopped responding to communications from the Tax Court and even its own legal counsel.  The judge noted that for this reason he could have just dismissed the case entirely.  While the judge chose not to do that, clearly this appears to have worked very much against the taxpayer.

3)    On many of the issues, the taxpayer offered no support for its position; making it easy for the Tax Court judge to rule in favor of the IRS.

4)    The decision is a “Memorandum” decision, meaning that it was heard and decided by only one Tax Court judge, not the full court, and is considered to not have significant precedential value.

There is an old saying with respect to tax cases that “bad facts make bad law,” and this case may fall into that category. The taxpayer in this case clearly had bad facts to begin with, and then its failure to respond to the Tax Court and failure to offer support for the positions taken made matters even worse.  However, it is possible that an IRS agent could use this case for support in challenging the cost allocations made by other apartment complex owners, so it is important to be aware of the case and prepared to support your allocations and distinguish your facts from those of this case.


Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.